NC Corporation (A036570) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. This is Willie Hong, CFO of NCSOFT. Thank you for participating in this conference call for the fourth quarter of 2021. Now let me begin my presentation with the fourth quarter earnings highlights. Fourth quarter sales totaled KRW 757.2 billion representing growth of 51% quarter-over-quarter and 35% year-over-year, driven by the successful launch of Lineage W. Operating profit posted KRW 109.5 billion, up by 14% versus the previous quarter. On a Y-o-Y basis, operating profit decreased 30% because key operating expenses such as labor costs and marketing were higher. Pretax income was KRW 148.9 billion, an increase of 18% Q-o-Q and 25% Y-o-Y. And net income was KRW 121.7 billion, up by 22% Q-o-Q and 52% Y-o-Y. To talk about the 2021 full year numbers, sales was KRW 2,308.8 billion; operating profit, KRW 375.2 billion; and net income, KRW 395.7 billion. Next, let me go over the sales of each of our IPs. As you know, Lineage W was successfully launched on November 4 last year, ranking #1 in sales in Google Play Korea and Taiwan. Across the 58 days after launch, the game recorded sales of approximately KRW 357.6 billion. And in addition, PCU and other key indicators have reached the highest level of any game released by NCSOFT and continue to improve. Lineage M sales was KRW 88.8 billion, a decrease of 41% Q-o-Q and 58% Y-o-Y. In our view, we do believe that sales has shown a natural softening as more than 4 years have passed since the game first launched in Korea but user traffic numbers are still being maintained at a stable level. To talk about the Lineage M -- or Lineage 2M. Lineage 2M recorded KRW 124.5 billion, lower by 21% quarter-over-quarter and 25% year-over-year. The launch of Lineage W had a limited impact on Lineage 2M Korea sales, and the stabilization of sales in Japan and Taiwan is almost done. So I believe we can expect much more stable sales trends going forward. For Blade & Soul 2, it posted KRW 31.5 billion. Around 6 months has passed since the launch but Blade & Soul 2 is still in the top 10 in terms of sales at Google Play. The preparations to launch in the global market are also going smoothly. The sales of the 5 PC online games combined was KRW 89.5 billion, down by 12% Q-o-Q and 26% Y-o-Y. Guild Wars 2 sales was KRW 22.2 billion, which is higher by 16% Q-o-Q and 57% Y-o-Y. Expectations surrounding the new expansion pack has led to the growth on the top line for the second consecutive quarter. As you are aware, the official launch will be February 28, and the presale levels have exceeded our internal expectations. In addition, we expect the expansion pack will be another opportunity to confirm the power of the Guild Wars 2 IP. Lastly, royalty totaled KRW 43.2 billion, up by 6% Q-o-Q and down 2% Y-o-Y. The royalty from PC games, licensing games and Lineage M Taiwan are all similar to the previous quarter. Next, let me go over the full year 2021 performance of our games. . Mobile games in total recorded sales of KRW 1,610.5 billion, a decrease of 4% Y-o-Y and representing 70% of all sales. The sales of Lineage M and Lineage 2M have declined as we have mentioned versus the previous quarter, but the huge success of Lineage W since December has enabled us to have another strong year. . Sales of the 5 PC online games in total was KRW 426.1 billion down by 7% Y-o-Y and Royalty sales was KRW 172.4 billion which is 21% less Y-o-Y. Next, I'd like to go over the full year 2021 performance by region. So to break it down by region. Korea was KRW 1,575.2 billion, Other Asia, 447 billion, North America and Europe combined, KRW 114.3 billion, and royalty KRW 172.4 billion. Sales outside of Korea and royalty sales jumped 82% versus the previous year and accounted for 32% of total sales. Now let me discuss expenses. Q4 operating expenses totaled KRW 647.7 billion, which is up 60% by both Q-o-Q and Y-o-Y. . And maybe to walk you through the different line items. Labor cost was KRW 256.2 billion, an increase of 47% Q-o-Q and 39% Y-o-Y. The main drivers were an increase in head count and early recognition of the incentives related to the success of Lineage W. Marketing was KRW 118.1 billion, which is up 119% Q-on-Q and 164% Y-o-Y due to the marketing spend for Lineage W in the global market. And depreciation was KRW 25.6 billion, higher 9% Q-o-Q and 53% Y-o-Y. Variable costs and other expenses totaled KRW 247.7 billion, an increase of 63% Q-o-Q and 57% Y-o-Y, due to the increase in distribution fees paid for higher mobile games sales. So that wraps up my presentation on the fourth quarter and also the full year 2021 performance. Continuing on the success of Lineage M in 2017 and Lineage 2M in 2019, NCSOFT has once again ranked #1 in Korea with the release of Lineage W in 2021, driving the growth of the Korean mobile game market. We have secured a solid leadership in the Korean market, but not being complacent, we do continue to think about what the right process is for our success. The company continues to think deeply about what the right direction and strategy would be to strengthen its long-term value. The company does recognize that just using the Korea domestic market would lead to various limitations in enhancing its overall value. So thus, the top priority of the company is to confirm and see its potential in the global market and emerge as a truly global game company. So we clearly recognize that global making inroads into the global market is not a easy nor a very simple task. However, we do believe that taking the first step is very important. Thus, the first step in this direction for us will be Lineage W and TL, and we are planning to launch Lineage W in the West, including the U.S. and Europe in the second half of this year. And TL is also aiming for a second half global launch. Moreover, as shown during the teaser that we released yesterday, the company is planning a solid lineup of products to follow Lineage W and TL in the global market. In addition, up until now, the company has been very focused and also successful in MMORPG games, as you are well aware. However, not being complacent in this area, we do believe that making global inroads and increasing our overall market share and our position in the global market is something that is very necessary. So as a result of that, launching new games into this market and being successful is what we want to focus on going forward. So these will represent, as shown in the teasers that we showed you yesterday briefly, a wider variety of genres, including RTS, Battle Royale, shooting and also a new area which would be interactive movies. In addition, by releasing new games that represent a wider variety of genres and support multiple platforms, we will be able to build a stronger presence on the global stage. In addition, as mentioned during the third quarter call that we had last year, the company is also preparing to apply NFP to our games -- NFT to our games in 2022. So we do believe that there will be other opportunities to elaborate about this in more detail. However, 1 of the things that I would like to highlight is that we do believe that the philosophy that we believe is very firm and very important would be that this blockchain technology should present a new value that is different from the values presented before to the players of our games. And the reason that we do believe this is because within the games that we are creating, we do think that having a very advanced economic ecosystem and also very stable NFT and blockchain technology would be 1 of the overall assumptions upon which we would start to develop our games. And we think that, that in itself is very important. And finally, maybe I can touch upon our overall dividend spend. As was the policy during the past 3 years, the company, again, for the 2022 to 2024 fiscal year is committing to a cash dividend policy of 30% of consolidated net income to our shareholders. The company will continue to put its best efforts into making sure that it executes its strategic projects for long-term growth to generate better performance in the future. So for this, we look forward to your continued support and interest. Thank you very much.

[Foreign Language] [Operator Instructions] The first question will be provided by Eric Cha from Goldman Sachs.

[Interpreted] So thank you for the opportunity to ask questions. The first question that I would like to ask you is about a update on the overall new game pipeline going forward. So for the existing games that we previously were familiar with, there was TL. There was also the second areas of servicing for Lineage W, and there's Aion 2. For TL and the second areas for Lineage W, I do think that you mentioned the second half of the year as the timing. But if you could be more specific in terms of when during the second half, whether it would be the front, the middle or the end of the second half of the year, that would be appreciated. And for Aion 2, Aion 2 was not part of the game that was unveiled yesterday, what the teaser is. So what does that mean for the schedule for Aion 2 in itself? In addition to these 3 games, there were also other games that were mentioned yesterday unveiling. So when should we expect these games to be launched. So is this next year's business? Or is there something else? If you could provide some more detail about that update, that would also be appreciated. In addition to that, you also mentioned that blockchain technology would be applied to the games. So what specific games are the ones that we just mentioned would blockchain be applied to. The second question that I would like to ask you is about Lineage M. Looking at your overall performance, I do think that the Lineage M quarter-on-quarter drop in performance is 1 thing that would probably be the most noted by the community of investors. You did mention that this is due to the natural decline that we see in this game because it is an older game now. But in my view, I think that this is the largest Q-on-Q drop that we have seen since the launch of this game. So I would like to know what the drivers behind that is? Is this due to some of the company strategy. And if so, do you believe that due to the actions that you may take going forward that there is a possibility of there to be a rebound in the overall performance? Or is this more due to external factors and as a result of that, this is the overall level that we should continue to expect going forward. So I think that for some of the weaker traffic, this is something that we understand. But I do think that a bit more color about the overall situation is something that would be appreciated.

[Interpreted] So first, Eric, thank you for your very good questions. So in terms of the timing, I think that for Lineage W, it would be fair to expect the early days of the third quarter. So in terms of the timing I think that for our Lineage W it would be fair to expect days of the third quarter. And for TL, I think that to be a bit more conservative in terms of the time line, we would have to say maybe middle to end of the fourth quarter would probably be the right timing. But in terms of the timing, I do think that from the company's perspective, while we are communicating with the outside or outside of the company. There are some changes that we would actually implement. So maybe I can take this opportunity to elaborate a bit about that. So if you look at the practice that we had adopted in the past, for any new games that were developed, we actually did not share the overall development process with you. However, right before the launching was when we would disclose the new game. And usually, thereafter, there would be one-way communication and also various advertisements and promotions that we conducted and marketing activities that we're engaged with about that game. However, going forward, we want to change this approach a bit, and therefore, through the overall development of any new games that we have, during that development process in itself, we do want to share more information with the customers and our users so that we can get feedback from those users and reflect that into the development process. So this would be an open user communication and opened R&D process that we would be adopting. Any user demands and also any user criticisms that we get through this overall communication process would be reflected into the R&D of the game and also reflected into the overall and quality of the game in itself.

[Interpreted] So in addition to the various teasers that we actually shared with you yesterday, from the years 2023 to 2025, if we look at the overall pipeline that would take place across those years. It's actually very tightly spaced and also very robust. So what that means is that we do believe that this will be a launch period during which we will see multiple numbers and numerous numbers of games being launched. So that's the plans of the company as of now. So after this conference call, we do think that from March going forward, the overall plans that we have is that in very short intervals, we do want to have opportunities to communicate to the market about what we are developing and what we are doing in terms of our new game development initiatives, and also have an opportunity to listen to what the users think. So again, this will be a very tight cycle of listening and showing. So I think that, that's the intention going forward. And you did mention Aion 2 at during your question. So maybe to elaborate a bit about that. For Aion 2, there has been a slight modification of the strategy, and now we are going to pursue a global simultaneous launch for this MMORPG game. So with regards to the platform of the game in itself, I don't think that we're -- it would be the right time to share the specifics about that today. However, what I can say is that we're exploring a platform that would be suitable for the global market. And I also mentioned once again that from 2023 to 2025, there would be multiple games that we would be launching during this period of time. So I do think that, that would be an answer to your question. In addition, I think that the second question you asked was with regards to the cannibalization situation. It is true that if we look at the overall strategy that we have been adopting since the launch of Lineage W, in particular with regards to Lineage M, there was some moderation in the overall activity that we have had for this game. However, different from past precedences of cannibalization that we have seen, if we look at the traffic of Lineage M, and the changes that there have been, in actuality, it has been not very much. So the overall changes that we see are very small. And in the case of Lineage 2M, because it is also a very different IP, we do think that the implications of cannibalization there also were very limited. And for the Lineage W launch, now it's been around 3 months since the actual launch has taken place. So if we look at the overall implications on Lineage M in terms of the overall top line and also traffic numbers, as mentioned before, what we see is very limited cannibalization taking place, and we think that will continue to be the situation there. And also, you did mention NFT and blockchain as a part of your question. So maybe to briefly touch upon that issue. I do understand that from the market, there is a lot of questions about what the business model will be. And also, if you look at the recent situation, for market valuation, there has been a decline. So within this backdrop, I just would like to highlight that the answer I am giving now is not a reflection of what is taking place within this overall market. But it is, as mentioned during the third quarter conference call, the overall internal principles that we have had from day 1 when we decided to actually introduce NFT for our game. So I would just like to maybe take this opportunity to elaborate a bit about what that actually is. I think that within the market space, if you look at the concepts that there is a lot of confusion between P2E and also NFT or blockchain technology. So I think that everyone treats this as 1 as the same. However, to be very simple from day 1 and from the very beginning, the intention that we had was not to create a P2E game. And I think that this is something that I mentioned during the third quarter call also. Within the games that we have, in creating a very stable in-game ecosystem, I think that we do have the experience and also capabilities that are stronger than any other company within this industry of being able to create that type of economies within our games. So I think that this is something that we have already been able to prove. And this is something that we have been able to accumulate over a very long period of time. So to be a bit more -- elaborate a bit more, if you look at the overall balance that we do have within our games and in the in-game ecosystem, the NFT technology that we will introduce and apply is not to change or to create havoc to that balance in which we already have created for the very stable value of the overall in-game assets that are existing. So to be very simple, I think that when we look at NFT, the overall approach that we are using is to look at it from a standpoint of what type of value can we actually present to our game users. So that is where we start from. And in terms of the overall execution, that will be the focus that we have. It will not be coming from a viewpoint of investors of NFT or investors of coins. So that's not the intentions that we have, and this is something that I would like to make very clear. So maintaining the existing VMs that we have and also the game economies and our overall ecosystems that we have already created, so keeping that intact, we are looking at NFT to see and explore what additional values we will be able to present to our customers by applying this technology. And by creating that in-game value, we want to be able to first be able to objectively have a certain value that we are able to create. Second is to be able to store that value. And third would be to continue to be able to enhance that value. So as a result of that, that is what we want to reflect into the upgraded or next-level ecosystem that we're trying to create. So I think that when many game developers talk about NFT, they tend to talk about the technical aspects or the technology that is required. Of course, this is very important. But I think that in terms of the technology solutions that we need, this is something that we can look to our in-house resources to try to solve or we could also partner with or work with external partners in trying to solve that. So this is a 2-track approach that we're already using. So on that standpoint, I think that we're well covered. But what is more important is that when we are creating this overall ecosystem. I think that the very important principle that we're looking at is that by applying this NFT technology, we do want to make sure that we do it in a way that does not hurt the overall existing economic ecosystems that we have in our existing games, it does not hurt the balance that we have already created, and it does not hurt any of the value of the existing assets of those games. So that is a very important principle that we're abiding by and the execution of this overall technology. So I do want to make that very clear, and I wanted to reemphasize it once again. And to go back to your original question, which is what games would NFT actually be applied to. This is something that I hinted about during the third quarter call, but it would be to the second regions that we would be looking at to release Lineage W in. So that is where we're focusing our efforts on as of the current time.

[Foreign Language] The following question will be presented by Jong Hwa Sung from eBest Investment Securities.

[Interpreted] So I just would like to ask 1 question, which is that for the fourth quarter, with regards to the big success that you have had for Lineage W and the incentives that you would be paying accordingly, is everything recognized in the fourth quarter? Or is there still amounts that would be recognized or paid in the fourth -- in the first quarter and second quarter of this year? So again, how much was recognized in Q4? And is there anything left over for Q1 and Q2?

[Interpreted] So thank you for your question. I think that to give you a straight answer to your question, it would be that -- in actuality, the additional amount that will be recognized, if any, in the first quarter would be very, very small. So I think that it would be safe to say that the Q1 numbers represent a normalized labor cost number that we would have. So again, we look at the Q1 numbers today and I think that from the company's perspective, we don't want this to continue to have an impact on our overall performance. So again, Q1 will be a normalized number. And in addition to that, I think that if you look at the Q4 performance in terms of the overall top line, in actuality, we did better than what the overall market consensus was. But if you look at the cost side, I think that the costs were a bit high. If you look at the overall stance that we have for this year, 2022, I think that one of the main focuses that we will have is to make sure that our overall resource allocation is more efficient. So in particular, with regards to our overall advertising costs and promotional costs and also our labor cost, we do want to make sure that we can be more efficient in those areas. So that would be an active initiative for the company this year.

The following question will be presented by Stanley Yang from JPMorgan.

[Interpreted] Thank you for the opportunity to ask questions. There are 2 questions that I would like to ask you. First during your presentation, you did mention that for the overall global launches that you will have going forward, you are looking into diversifying the genres that these games actually represent. I do think that, that is a very good direction. But as you can see from the success that Lost Ark has garnered in the U.S., it is possible for an MMPG game to actually succeed overseas. So I think that, of course, diversifying your genres is important, but actually using the existing strengths that you have and leveraging them rightly is probably also as important. So I understand that TL is an MMORPG game. If you could elaborate a bit more about what TL actually is in more detail in terms of the overall content of the game, I think that, that is something that we would appreciate. In addition, in addition to diversifying the changes, I think that something that is probably as important is also the business model that you adopt. Particularly, if you are going to target and overseas market, having a new type range for its business model is probably something that you would try to explore. So if that is the situation, would TL be an opportunity to do so? Do you think that there is a possibility that a new type of business model would be something that you would look into? The second question that I would like to ask you is that there were a series of new games that you shared with us a couple of days ago through the teasers. So is there a showcase event that would be forthcoming to maybe show us more.

[Interpreted] So thank you for your question. I think that you know we are also happy to see the success of MMORPG overseas. And looking at that, I think that we feel the same and share the view that you also share. So as a result of that, what I was trying to say before is not to downplay the strength that MMORPG has. However, if you look at our overall stance, I do think that we recognize that we have been a bit overly focused on MMORPG. So I think that what we're trying to say is that we're trying to be more balanced in the approach that we have. So maintaining the strengths that we have in the MMORPG side, we do want to be able to diversify into other genres. So that diversification is something that we will put the full force of our company behind to try to achieve. So if you look at the situation to date for the MMORPG games that we had in Korea and also Asia that we took to the global stage, I think that it is true, and we also recognize that with regards to the other overall customization and maybe curation that we put into appealing to a more western market was a bit lacking. So in that area, I think that there were things that we could do better, and we do want to address that point. So as a result of that, for the games that we will be launching going forward in a more western market. I think that in terms of the overall content, the business model and also the platform across all of those different pillars, we do want to have a different strategy for -- that we have had versus the existing MMORPG games that we have had. So this is something that we do want to apply, and I do think that, that will be reflected in the strategy that we have for TL. And maybe to elaborate in detail a bit about what that actually is. So first, to talk about the content side. Of course, we will be maintaining our PVP content. But added to that, I think that we're also going to beef up the PVE contents that we have within the game. So that's something that we're focused on. And in terms of the overall storyline or the narrative that we have for the game system themselves, we're trying to make the overall personalities or the personas that we have within the game to be a bit more 3-dimensional. And added to that, for the story in itself, we're trying to make sure that the overall narrative flows more smoothly. So that is something that we're trying to create. And also, we're trying to create a seamless open world in terms of the overall changes to the environment that we're going to accompany with this game. So as a result, versus the existing MMORPG games, I think that we're trying to actively introduce more factors or elements of exploration and also finding so that we can actually maximize the overall game play -- the game play experience for the users. And then lastly, in terms of the platform, I do think that we recognize the overall influence that Steam has as a platform. So as a result of that, we are actively reviewing the possibility and exploring possibilities of launching or playing our services also on Steam. And you did mention or ask about the showcase. In actuality, we aren't going to be having a showcase like we had in the past per se. However, again, the strategy going forward is to have more frequent and a series of intervals at shorter intervals of communication with the market, which would be, of course, 2-way communication in which we would be able to listen to what the actual users are saying to us. So since that is going to be the approach going forward, we're not going to have like 1 big event where we would showcase the new products that we have going forward. But again, it would be more tightly laid out going forward of having a very tight cycle, various events, a series of events or a series of communication with you. So I think that the overall approach that we are thinking about going forward would be different from the past. It's not going to be 1 showcase event, but it's going to be a series of communication approaches and incentives that we would have launched so that we can always be present within the communication that we have with you.

The following question will be presented by Mike Hong from CGS CIMB Securities.

[Interpreted] So there are 2 questions that I would like to ask you. About the overall genre that TL does represent. And in terms of the content, you did mention that it is an MMORPG game, but could you be more specific about what MMORPG game this actually is. So will it be a full 3D MMORPG game? Will it be a 2-dimensional MMORPG PG game? What type of actual MMORPG game can we expect? And in addition to that, is there a reason why you continue to call this title by its project name, which is TL. If it's going to be launched within the year, I think that it would come out with an official name, but it tends to not be the situation. So I would like to ask why that is the reason. And secondly, if you want to defend the performance of your existing games, I do think that increasing your marketing spend in that area is probably something that you would have to do. That would, of course, increase the overall cost that you have, but you also mentioned, at the same time, that you're going to try to engage in becoming more cost efficient in terms of the overall costs that you have. So how do these 2 things go hand-in-hand?

[Interpreted] So I think that to just cut to the answer, for Project TL, it is going to be a full 3D MMORPG game. It will be PC and console based. So it's going to be multiplatform. And the overall nature of the game will be a deeply immersive traditional MMORPG game. So I think that to highlight the main characteristics game will have. The first is that in terms of the overall narrative of the game. Again, it's going to be a deeply immersive storyline. Secondly, it's going to be full 3D. So as a result of that, we do think that the overall visual experience of the users will be very unique and new. And thirdly, the overall platform over which this will be serviced will be expanded versus the existing platforms that we currently provide. In addition to that, as mentioned many times before, it will be targeting the Asia, Europe and also North America market, the overall global market at once. So right now, we are preparing the game to be serviced in 12 different languages and a lot of progress has been made on that point. In addition, TL in itself is not the project name. And I think that a lot of people misunderstand TL to be an abbreviated form of the Lineage, which is not the situation. TL actually stands for Throne and Liberty. So it is the official name of the game. And that will be what we will be -- what will be the title of the game going forward. And on the marketing side, the intention that we have for this year is to decrease the overall marketing spend as a percentage of revenue to around 10%. So this would be the overall intention that we have. So we want to decrease it. And as mentioned before, we are doing an overall cost efficiency initiative. So marketing is also part of that. We're doing an efficiency analysis. There is a task force team that we have created to look into that. And if we look at the marketing approach that we used last year for the new game launches, some were successful, some not so much. So we are looking to the overall efficiencies of the marketing activities that we engaged upon, doing an analysis about that. And this year, we are going to decrease it to 10% of revenue. So this would be one of the core initiatives that we have on the cost management side for this year. So I think that that's all of the questions that we have as of now. I would like to thank everyone who is on this call today. And I just would like to end by saying that we do recognize that this year would be for the overall company's performance and also in terms of our profitability, a year in which we need to make sure that there is a turnaround in the overall trends. So taking the comments or the points that you made today, I would have to say that we are exerting our utmost effort to try to execute all of the plans that we have shared with you on this call. So again, for our investors, for our shareholders, continuing to gain the confidence and also looking forward to your support in these areas. Again, we are going to do our best so that we can show you the commitment that we have. So again, thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]